The Australian Financial Review (subscription required) and The Australian (here) have run commentaries over the past few days asking why the huge surpluses the Commonwealth Government is accumulating are not simply returned as tax cuts rather than being invested in the stock market via such things as the Future Fund, the Higher Education Endowment Fund or the Health and Medical Investment Fund
It is extraordinary that the government collects revenue from taxes and invests in on our behalf in equities. This is particularly so given that the Government is avowedly free-enterprise and anti-socialist.
The political argument for non-returning the funds is that there is a relatively low political return on giving tax cuts. The 2006 tax cuts gave no boost to the stocks of the government and, in any event, the ‘me-too’ opposition will certainly match any cuts offer from the Government this year. The economic reason is that tax cuts are being withheld because the economy is operating at close to full capacity so that further boosts to public spending will increase the need for interest rate hikes.
Apart from being immoral the political reasons don’t make a lot of sense. Making really significant income and company tax cuts would be politically appealing. The economic reasons are more cogent – investing the resources in equities will reduce the financial claims that retirees and the education sector will make in future generations thereby enabling the fiscal advantage of lower taxes to be deferred to the future when conditions may be less buoyant. But it is a bizarre twist – resources are being held from the private sector because private spending is judged to be too high. Incentives to save have been reduced by the role of superannuation.
Despite their protestations the Coalition Government remains the heaviest taxing party in our post-war history. In part this is a symptom of the commodities boom and the restricted possibilities for investing in additional new infrastructure because the full employment of resources will create excess demand pressures. It makes me profoundly uneasy to have a Government not returning unneeded tax revenues to citizens and firms. Moreover investing funds in stock markets will not have zero inflationary impact - asset prices will be further bid up.
It is our money and if there are no good public sector projects to fund – perhaps because of resource constraints in the economy - then it needs to be given back not invested in equity markets on our behalf.
Update: Slim has posted on this over at the Dog’s Bollocks and Peter Martin with a different angle that emphasises the failure to predict surpluses here.